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There’s More to Russia’s Competitiveness Than Meets the Eye

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I’ve finally gotten around to looking more closely at the World Economic Forum’s annual Global Competitiveness Report, released last week. The report ranks 133 countries on the basis of 12 measures of an economy’s competitiveness: institutions, infrastructure, macroeconomic stability, health and primary education, higher education and training, goods market efficiency, labour market efficiency, financial market sophistication, technological readiness, market size, business sophistication and innovation.

Russia’s overall rank dropped from 51 to 63, but as the country highlights discussion makes clear, this overall rank masks a more telling underlying story:

Russia falls 12 places this year to 63rd, the only BRIC economy to see a decline in performance. Russia’s main strengths are its large market size and reasonable macroeconomic stability (although this has been partly the result of windfall oil revenues and might not prove sustainable in the longer term). However, to improve its competitiveness further, the country must tackle a number of structural weaknesses. Of major concern are a perceived lack of government efficiency (110th), little judicial independence in meting out justice (116th), a lack of property rights (119th), and more general concerns about government favoritism in its dealings with the private sector. Private institutions alsoget poor marks, with corporate ethics in the country placing Russia 110th overall on this indicator. The drop in overall rank is mainly attributable to a weaker assessment of the functioning of factor markets, with, in particular, goods markets (ranked 108th) and financial markets (ranked 119th) getting poor marks.

Here’s a question – if Russia ranks so dismally in the aforementioned metrics, how does it maintain such a relatively high overall ranking? A closer look at Russia’s actual country profile reveals that market size (7th) and macroeconomic stability (36th), and to a lesser extent, labour market efficiency (43rd) do much to keep Russia’s overall ranking in the top half. Looking in yet more detail (page 2 of the Russia profile here), two things strike me as evident, which the above blurb already touches upon. The first is that market size is a quantitative judgment based on hard data – that is, it has nothing to do with anything related to governance issues. The second is that the macroeconomic stability subfactors can be potentially very sensitive to change according to market externalities beyond Russia’s control – again, unrelated to governance. So the conclusion on this front is that while Russia may be relatively better than many countries overall, it would be well advised not to rest easy.

What’s more is that looking more closely at the detailed rankings of the subfactors, what becomes clear is that within the “institutions” section (part 2.2 of the data presentation), Russia consistently ranks in the bottom half and frequently near the very bottom on a number of measures, underscoring even further how fragile its overall ranking really is.

Aside from the aforementioned concerns in the WEF highlights, Russia also ranks 124th regarding the burden of government regulation (worse than Zimbabwe), 111th in efficiency of legal framework in challenging regulations (worse than Pakistan), 114th in transparency of government policymaking (worse than Italy and Primo Berlusconi), 112th in reliability of police services, 119th in strength of auditing and reporting standards, and last but not least, 127th in protection of minority shareholders’ interests (worse than Venezuela).

The bottom line here is that strong institutions matter. Without them, everything else eventually falls apart. While some may deride the methodology of the World Economic Forum’s study, or its ideological bias, or its emphasis, the fact of the matter is that the overall findings do not vary significantly from those of other globe-spanning comparative studies from Transparency International, Reporters Without Borders, the World Bank or any other governance-minded organization. And while some may continue to point fingers at the United States, NATO, the EU, or whatever other culprit du jour, it doesn’t change the fact that the weakness of Russia’s institutions remain a serious liability both for Russia and its neighbors, as well as for its peers around the world.